Question

Singapore Airlines just signed a contract to buy 10 Boeing 787 to be delivered in 1 year. The contract value is SGD 3.5 billion. The interest rates are the US is 5% and 4% in Singapore. The spot rate is 1.353 SGD per dollar.

A. Show how Boeing can hedge within the money market?

B. Find the no-arbitrage forward rate USD/SGD, and assume Boeing entered into a forward position. Would it go long or short?

C. Suppose that there are one-year USD/SGD call options with a strike price of $0.747 for a $0.015 premium, and put options with a strike price of $0.747 for a $0.018 premium. What option should Boeing buy? What's Boeing's gains/losses if the spot rate turns out to be $0.7285 or $0.7735 in one year?

Answer 1

| Value of contract @ 3.5 billimSGD Spot rate = 1353 SGD fontedest rate a Stosova in USA = Sopot pl. in Singapore 479100L Ole Money Market Hedge:- stop:-1 borrow from Sigapore sich amount whosen future valuie will - he 3.5 bilimromotor 3.5 1.04. 1 3365384615 SGD. 829 Step: 2 convert that borrowing into USD. 3365384615 = 2487350 048$ De 10353 Stip:3 invest it into USA at 5% 1 - 2487 350048 X 1.05 = 2611727550 $ telvolfina Step 4 after ing your we will recieve niwlows a payment from singapore sono el importe T & we win pepay the locene

Bo No Arbitrage forwardit Ratenia a kas Fodwould gate = Spot rate X tra ] deo) Ditt 99;2030 to Hof 13 Astitori al 353.05 of R120I10366 Friter into a long forward Contract to .buy a dollar & Sell SoD after me yaylalt forward is Rates Payment Recive after me year = 3.5 billion.. 1.366 = 2562225476 $ o buy a Put option at $0.018 Premium after me your if Spor oare 0.7285$ we will exceasier the put optimi Sell = 3.5 billion xoo 747 $ = 2614500000 $ Gain 10.747 -0.7285 – (0.018X1.05)) x 3.5 Billim = -0.0004 x 35 billion 2 E1400000 loss

mif spot jate tuons out to bet ola LO. 7735 $ we will not Excersice the contract o wo will be bearing a hloss of premium as well as the Opportunity cost of it. horts (0.018X1205) x 3,5 billion, 26 6615000 of loss oki

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